Wednesday, June 30, 2010


* The Summer 2010 issue of TAX WATCH, the Tax Foundation's quarterly tax policy newsletter, is available to download. Click here to download.

Highlights from the Summer 2010 issue include:

• A Smaller Federal Budget Starts at Home
• Healthcare Bill May Redistribute Billions
• Testimony: Protect the Economy from State Taxes
• Study: Bag Taxes Don't Work

* Glad to see that Bruce, the MISSOURI TAX GUY, has brought his BUZZ-like Sunday “Reads from Last Week” back.

I am happy to have been a small part of bringing Bruce to the tax blogosphere. Sorry we won’t be “bending elbows” in Austin. Maybe next summer in St Louis.

Hey, Alltop, what’s taking so long bringing the MISSOURI TAX GUY back to the tax page?

* The blogging tax pro from Grandview, Mo goes on to begin what may be a series on basic accounting education by talking about “The Company Balance Sheet”.

* Kay Bell tells us that “Today's Taxes Aren't Too Bad” at DON’T MESS WITH TAXES.

A chart included in the post shows that the top rate was as high as 94% in 1945. The top rate the first year I began preparing 1040s was 70% - but there was a 50% “maximum tax” on earned income.

Although tax rates were higher in the early years of my career there were more deductions available (i.e. state and local sales tax and state and local income tax, and all personal interest), there were no phase-out thresholds or reduction of itemized deductions and personal exemptions, and there also was the availability of “Income Averaging” and “10-Year Averaging”.

* Oi vey! Roni Deutch reports that “7 States that Still Owe their Citizens Refunds” at her TAX HELP blog. Surprisingly NJ is not one of the seven.

* Many sincere thanks to fellow tax blogger, and fellow artisan, Mary O’Keeffe of BED BUFFALOES IN YOUR TAX CODE for her kind words in defending my right to trust my own brain over a flawed software package in her post “Musings on Artisan Bakers and Tax Preparers”.

Mary, I do think it is just as much fun to prepare a tax return “artisanally” as it is to eat freshly baked bread – which is why I still do it after 39 seasons. And if I am ever in the Albany-Schenectady-Saratoga Springs-Troy area I will take you up on your offer of a breakfast at Perreca's Bakery.

* Mary follows up her defense of me with a retraction of her suggestion that I try the “Free Fillable Forms” program offered by the IRS in the appropriately named post “I Withdraw my Suggestion of Free Fillable Forms!”.

I had heard about this program last year, but was skeptical because, like the other IRS free file option, it was maintained by a 3rd party vendor and was not a direct transmittal by and to the IRS.

Mary now joins another well-respected voice in the tax world in wanting what I do –

And I agree with Nina Olson {IRS National Taxpayer Advocate – rdf}. The Free Fillable Forms ought to be hosted on secure IRS servers, so taxpayers know that their sensitive and confidential data is going directly to the IRS, not to an unnamed private company.”

If you ever thought of using the IRS “Free Fillable Forms” program it is very important that you read this post.

* Tonya Moreno discusses the “Florida Tax Amnesty” at ABOUT.COM: TAX PLANNING: US. Florida does not have a state individual income tax, but the amnesty program covers a lot of other taxes.

* No wonder governments are all facing historic deficits. ACCOUNTINGWEB.COM tells us one way the IRS is spending its budget in the article “Collecting Unpaid Taxes Four Pennies at a Time”.

* We begin and end this BUZZ with the Tax Foundation’s TAX POLICY BLOG, from whence comes the word that “New CBO Report Shows Rich Paying More than Fair Share”.

According to the post -

A new report by the Congressional Budget Office undermines President Obama's constant refrain that the "rich" are paying less than their share of federal taxes and that the middle class is over burdened. The report, Average Federal Tax Rates in 2007, shows that the wealthiest 20 percent of households earned 55.9 percent of all income but paid 86 percent of federal income taxes and 68.9 percent of all federal taxes.”


Tuesday, June 29, 2010


Much space has been taken up on tax blogs lately regarding the rampant fraud relating to the refundable homebuyer tax credit. It got me thinking . . .

There is no doubt that home ownership is a part of the “American Dream”.

Home ownership is also, if done correctly, generally a good investment – and under the right conditions can be “more better” financially than renting.

But home ownership is not an “entitlement”, not a “birth right” of all Americans – it is something one aspires to and must prepare for, something that one must work for and earn.

There is a theory that a person, or family, will take better care of a home that they own then they would of a home, such as an apartment, that is rented. But it is “more true” that a person, or family, will take better care of a home that they have worked and saved for then one that is handed to them.

Many people do not have the temperament, nature or ability, financial or otherwise, to properly own and maintain a home. They obviously should not be homeowners.

Should the government aggressively encourage homeownership? I do believe there is benefit in assisting current homeowners via a tax deduction for real estate tax and “acquisition” mortgage interest. But I have sincere questions about the appropriateness of handing $8,000 to any Tom, Dick or Harriet who wants to buy a house.

The ease of buying a home is what got us into this trouble in the first place. A client mentioned to me last year that when he went to purchase a home for his family, in the late 1970s, he had to prove to the bank every penny that he earned and that he could truly afford to own and maintain the home. He observed, correctly, that there was a point recently where the only question the bank would ask is “How much to you want?”!

Should the government aggressively help specific industries or markets that are temporarily depressed, possibly as a result of their own actions? Should we help increase home sales or car sales with tax benefits and other governmental incentives? What if the toothpick industry is depressed? Should we provide a refundable tax credit for the purchase of toothpicks?

The government should attempt to stimulate the economy in times of downturn. It should encourage savings and investment in general – but I do not think it should “bail out” in any form specific industries or markets, many of which have “made their own beds”.

The ability to live beyond one’s means, which appears to be uniquely American, has only been around in my lifetime. Before I was born there were no such thing as credit cards – no VISA or MasterCard. People could purchase items on credit from department stores like Sears or Macy’s – but the ability was usually specifically limited by item of purchase and short-term in nature.

You could purchase a washing machine or refrigerator “on time” or via “lay away”. But you could not buy a pair of pants and a record album and a power saw on credit and pretty much have forever to pay for them, as long as you made truly minimal monthly payments.

In the old west general stores would extend credit to farmers and ranchers for everyday items, knowing that when the crops were harvested or the livestock was sold the outstanding bills would be paid in full.

And one’s mortgage principal was never more than the initial cost of the home.

I sincerely believe that all high school students (or perhaps starting earlier) should be required to take a full-year course of study in financial stewardship (which would include a chapter or two on income tax).

So what do you think?


Monday, June 28, 2010


I have always said that blog post COMMENTS often get “lost in the shuffle”. Individuals who read a post do not always read through the comments. And, as comments are posted after the fact, sometimes days later, readers do not usually go back to see subsequent comments, unless they have posted one themselves or are keenly interested in the topic.

I received several responses to my posts on the e-file mandate for paid tax preparers – via Comment, email, posts by fellow tax bloggers, and “tweets”.

+ Paul C. Cinquemani, the National Association of Tax Professionals’ government affairs man, and I exchanged several emails on the subject. Here is what Paul had to say-

I really haven’t heard anything at all about the IRS providing free online filing to tax preparers who are now required to do so under the “mandate.” I’ve heard a whole heckuva lot about free online filing for taxpayers though!

My guidance on e-filing would be to learn how…seriously. Feedback is that it’s easy and efficient, saving preparers lots of time and expediting processing for clients. I know some preparers are going to have clients fill out “opt out” forms. Some are going to just prepare returns and give them to their clients to file. In either case, documentation is mandatory for your safety in showing good faith. The IRS will have your PTIN number and will quite probably ask why returns were not e-filed. We’ve asked about the “opt out” provision as regards the mandate, and we’ve not received any answers. We do know that the IRS will take a dim view of it. It wouldn’t surprise me to learn that the IRS will likely investigate it. They are very determined to get returns electronically.

We’ll just have to wait and see where that goes. We will continue to press for an answer. We are not alone. Many organizations have the exact same question

+ Among those who submitted comments on the posts was TAX MAMA Eva Rosenberg – a well-respected long-time member of the “Tax Blogosphere”, who offers “Tax Information With A Mother’s Touch”.

Eva assured me that tax software was not all that expensive and would not substantially increase my per-return costs.

She also stated –

The fact is, using professional tax software reduces your errors. It saves you time over preparing returns by hand - changes can be made to all relevant forms at one time, without lots of erasures. They include tools and calculators to quickly help you test scenarios - like MFS vs MFJ. The time it saves you more than makes up for the extra $10 per client - and gives you more time to take on more clients.”

(1) Tax preparation software will not reduce errors. In theory it will limit math and carryforward errors, but that is not always true. It has the potential to create different kinds of errors. One must do a thorough check of a return that the computer spits out in the exact same manner as one would with a manually prepared return.

(2) Tax preparation software will not save me time over preparing returns by hand. Over the years I have developed a certain style and rhythm so that I can prepare manual returns quickly without sacrificing accuracy.

Decades ago when I worked for one of the then ‘big-8” accounting firms we would use Computax to prepare returns. I would fill out an input sheet which would he given to a data entry clerk. At the time I felt that by the time I finished preparing the input sheet I could have completed the manual return.

(3) I do agree that tax preparation software does save time in terms of “rewrites”. If an error on one or two lines is discovered the correction can be made quickly without having to rewrite the entire return. And software applications can make it easier to review different scenarios. However I find that I can compare filing jointly to filing separately quickly by hand using a worksheet I have developed.

There are disadvantages of tax preparation software.

At every single continuing education workshop I attend either the instructor or a participant will say – “Your software will not, or cannot, do this properly – so you will have to ‘force’ the answer”.

Tax preparation software generates mountains of unnecessary subsidiary and auxiliary print-outs (as does the NJWebFile system as well). It wastes tons of paper.

+ Another well-respected member of the tax blogging community, and practicing tax professional, Trish McIntire of OUR TAXING TIMES posted this comment –

Robert, I am sorry to read you are planning on retiring.

Mandatory e-filing is coming. The IRS might slow down the timetable but it won’t be stopped. And with everything else happening, I don’t expect to see the IRS come up with their own online filing system anytime soon.

The mandate targets the preparer and not the taxpayer because it’s the preparer that is the hold up. Presented with the advantages of e-filing, I have found few clients who still insist on paper filing. How many of your clients would like the added convenience of e-filing but stick with you because they trust your work? Are there any who take the return you prepare and go to a 3rd party for filing electronically? Like doctors, it hard to change a tax preparer unless there is a big problem. If they like you, they will handle a little in inconvenience over the unknown of changing preparers

As for the software issue, I am sure all tax software has flaws but so do all tax preparers. No matter which package you choose, you will disagree with how they handle some issues. Just as you and I can disagree about the interpretation of a tax rule. The key is finding the software that is the best fit to you and to check the returns it produces. My software generates the return; I prepare it, sign it and stand behind the results. If I can’t do that, I’ll find a new software vendor.

Robert, I can’t imagine dealing with all the changes you will have to in the next few months (e-filling mandate and tax preparer registration/testing). You can say “No!” it’s not worth it and give up a job you like. Or you can the make changes. Think of all the blog posts the transitions will generate.

Good luck!

Not to worry, Trish. I don’t plan to retire until I can say I have prepared taxes for 50 years (or unless I win big in the lottery – which I do not play – or at Atlantic City). Besides, my clients would let me retire yet! Once you’ve had Flach you never go back.

I do not believe that it is the tax preparer that is holding up the progress of electronic filing. I believe the only reason so many returns are currently filed electronically is because of tax professionals. Many individuals are wary of electronic transmittal of private and personal information.

None of my clients, past or present, have ever balked about my not filing returns electronically. A couple of newer ones, usually the finally grown children of existing clients, have asked if I do – but have not shown concern when I tell them I cannot. I do not know if any client who has taken my completed manual return to an e-file “service”.

The only advantage to the taxpayer for filing NJ state returns electronically is that they can get their refund quicker. Many of my clients, at my strong suggestion, elect direct deposit, which is available on paper returns. And still, many of my clients still prefer to get a check in the mail.

Why must I be forced to turn to a software package when the “best fit” is my brain?

I look forward to registration and licensure, and have been a vocal advocate for registration and licensure during the entire decision-making process – although I still strongly disagree with no grandfathering and with exempting CPAs and attorneys from testing and CPE. Licensure and registration will certainly not be giving me any changes with which to deal.

And if the IRS does not “do the right thing” I will simply have to find a bulk e-file service provider and charge my clients the extra $10 or so it will cost to have the return transmitted electronically by this service, loudly blaming Congress for the imposition of the additional fee.

+ Echoing Trish’s comments was Bruce, the MISSOURI TAX GUY, another practicing pro and blogger, whose help I have called upon in the past.

Interesting, my friend.

Sadly I have been wonder the same things that Trish has mentioned here. You cannot stop the mandate. I do fore see there will be an “opt out” for the individual taxpayer but not for the tax preparer. We will be required to at least offer it. I say at least because although the odds are against it, I could see all of your clients actually opting out of the e-file mandate.

I am not sure where you are in your efforts to retire but I feel confident that the IRS is on a much quicker pace than you might be.

I would agree with Trish, that no matter what software you obtain (if you do) I am happy with three that are still available. (There was another at one point but Inuit bought it many years ago.) The truly nice thing is if the software doesn’t act accordingly or does something you don’t like there is usually away to over ride its calculations. So, in your case, you would merely need to re-input you calculations. That’s what I do.

I hope there is some way to get you to change your mind as I can assure you as Trish has, the change is coming, and in order to stay afloat, we’ll need to change as well

Hey, guys, I know full well that I cannot personally OPT OUT as a tax preparer. Only the client can OPT OUT.

If I cannot find a way to comply that does not involve purchasing flawed tax preparation software I would ask all of my clients to do so.

The NJ OPT OUT form has an optional line where the taxpayer can explain, if they wish, why he/she is opting out. If a similar option appeared on the federal form my clients would all write –

“The IRS does not provide a free way for my tax preparer to directly submit returns online at its website. I do not want to increase my preparer’s expenses, and ultimately my fee, by forcing him to purchase flawed tax preparation software.”

+ Joe Kristan told me like it was in a post on my letter to Shulman -

Remember, Robert, it's for their convenience, not yours or your clients, and they are bigger. That's all they care about.”

+ Elizabeth Rue (@Eligabiff) of Personal Financial Services in Indiana “tweeted” me the following -

I suspect if you had to file your returns in Fresno CA you would change your mind on e-filing! They have incorrectly processed & seriously delayed processing almost EVERY paper return we submitted this year.”

While I have obviously had to deal with lots of IRS FU’s over the years (and what tax pro hasn’t) I have not found excessive incorrect or delayed processing with my manual returns. But then I don’t send my returns to Fresno.

Thanks to all of the above for taking the time to provide their more than 2 cents on the subject. I always welcome comments from my colleagues “in the trenches”.

Let me end with some more of my own rambling thoughts on the subject -

Tax preparation software appeared long before the ability to submit returns electronically. I remember seeing computer-generated returns as early as the late 1970s. Tax professionals elected to use such software because they believed that doing so would benefit their individual practice. Others, like my mentor and myself, chose not to use tax preparation software, because they saw no substantial benefit to their practice.

When electronic transmittal of tax information to the IRS became available, software companies incorporated this into their tax preparation products. Specialized software was needed to accomplish the transmittal.

If tax return preparers will be required to submit 1040s electronically, the requirement should only apply to those preparers who have the ability to do so. If you currently use tax preparation software and therefore have the ability to transmit the resulting tax return electronically you should be required to do so, unless the client specifically forbids you.

But what of the tax preparer who does not currently have the ability to submit returns electronically. Why must they incur the burden of paying for the ability?

If the government wants something done in a certain way – the only purpose of which is for the convenience of the government (and not for public safety or protection) they should make it as easy and inexpensive as possible to comply. They should not force otherwise unnecessary and excessive costs on those who are required to comply.


Saturday, June 26, 2010


The guy in the picture is either watching a reality tv show – or perhaps a session of Congress on CSPAN.

* Speaking of Congress, Kelly Phillips Erb, the internet’s TAX GIRL, tells us that “Senators Talk Tax Hikes on the Hill”.

She starts out with the realization – “Wait? You mean we just can’t keep cutting taxes and increasing spending?”

Why do the idiots in Congress never suggest cutting spending – and when they do it is not cutting pork and waste but cutting needed programs?

Kelly goes on to tell it like it is –

You get how this works, right? Bush enacts tax cuts that the Republicans choose not to make permanent and then the Republicans pound on the Democrats for not “cutting” taxes. The Democrats, facing a tough election year, decide not to make cuts at the top but consider cuts at the middle which they will also not make permanent but can use them to run election ads proving that they “cut” taxes. Brilliant, huh?

The primary job and motivation (and sometimes it appears the only one) of every Congressperson is not the proper administration of the government – but to get re-elected.

* Do we need any more proof that refundable credits = an open call for tax fraud? David Randall tells us in the MONEY BUILDER blog that “Inmates, IRS Employees Among Those Found to Abuse Homebuyer Tax Credit”.

It should come as no surprise that, as David points out in the post – “the government ended up paying more than $25 million in fraudulent claims, according to an audit released this morning by the Treasury Inspector General”.

The post goes on to tell us –

Some 1,300 prison inmates – including 250 serving life sentences – received $9 million for homes that they could not have purchased while they were behind bars, the report found. Another 10,000 people received credit for homes that were also claimed as a first-time purchase by another taxpayer. In one case, 67 people used the same house as their qualifying purchase.”

And –

Homebuyer fraud was rife within the IRS as well, the report found. At least 34 IRS employees claimed the first time homebuyer credit, despite evidence that they already owned real estate.”

Do I need to repeat the chorus of “Where Have All the Flowers Gone”?

* Trish McIntire discusses this rampant fraud further at OUR TAXING TIMES and tells us that we “Can't Blame Congress for This”.

A “right on” to her bottom line –

The question is: has the IRS learn not to make the same kind of mistakes going forward? Let's face it, Congress will continue to write badly thought out tax laws. Has the IRS put into place a team that can think about how taxpayers will try to cheat and create checks and balances to catch them. They need to start thinking like a crook now. (Hey, what about the 87 IRS employees who were caught cheating on the FTHC?) Paybacks on the original First Time Homebuyer's Credit begin next year. How is the IRS planning to quickly catch missing repayments? Is there going to be a way for a preparer to check if a new clients has to repay? Or, will we have to wait until the notice months/years later?

* Sergeant Friday meets Tim Geithner, courtesy of TAX PRO Paul Caron. You tell him, Joe!

* #3 in Kay Bell’s series of Mid-Year Tax Moves comes from fellow tax bloger MISSOURI TAX GUY Bruce – “Midyear Tax Tip #3: Adjust Withholding”.

Actually the tip I sent Kay is sort of a companion to Bruce’s.

Wait – my tip is #4 – “Midyear tax tip #4: Evaluate Your Estimated Tax Situation”.

* Joe Arsenault sets us straight on the argument “But Honey, Golf is Deductible…” in a good comprehensive post at CAFETAX.

The post does include some good news (the highlight is Joe’s)–

As stated in the same IRS publicationThe 50% limit on entertainment does not apply to any expense for a package deal that includes a ticket to a charitable sports event. That is kind of cool! Your local children’s hospital hosts a golf tournament and your small business purchases the tickets. You may be able to deduct the entire cost of the tickets as a business expense. Just make sure the contributions are to a 501[c](3) for the full deduction. A good charity will let you know how much is deductible either way because there are additional criteria they must meet.”

* Joe Kristan comments on my letter to IRS Commissioner Shulman in his post “Because They're Bigger Than You” at the ROTH AND COMPANY TAX UPDATE BLOG.

Joe tells me (highlight is mine) – “Remember, Robert, it's for their convenience, not yours or your clients, and they are bigger. That's all they care about.” Unfortunately he is right.

* EXUBERANT ACCOUNTANT Scott Heintzelman asks the question “Dividend Tax – Is it Going Up?”. The exuberant one makes some good points about dividends in this post.
* Finally, Kay Bell joins other tax bloggers in announcing that the “Extenders Package Fails in Senate Again”.

Thursday evening, after the Senate came up three votes short of the 60 needed to advance H.R. 4213, the American Jobs and Closing Tax Loopholes Act of 2010, Reid reiterated that lawmakers will give the measure a rest and move on to small business legislation.”

As I said in a recent post – Congress can’t seem to do anything simply. They can’t simply decide that certain expired tax breaks deserve to be extended and pass a bill to that effect. And, judging from their actions, Congress can’t seem to get much right either.


Friday, June 25, 2010


Since writing to IRS Commissioner Shulman about the tax preparer e-filing mandate (see yesterday’s post DEAR COMMISSIONER SHULMAN) I have been giving the topic a great deal of thought – and I decided to share some of my thinking with you.

The requirement for filing an income tax return falls on the individual taxpayer. A person, or couple, with income that exceeds a certain threshold is required to file an income tax return.

An individual, or again couple, that is required to file an income tax return may decide to use the services of a professional tax preparer, like myself. They are hiring the preparer not to actually file the return, but to prepare the required return(s) based on the information they provide. I will prepare the return, manually in my case, and give it to the taxpayer(s), who then must sign and either mail it, or file it electronically through a service.

As a professional tax preparer, I have no obligation to assure that the return I have prepared is filed, or that any return is filed. I work for the taxpayer and not the Internal Revenue Service. I prepare an income tax return, federal and/or state, and give it to the taxpayer(s). It is then the responsibility of the taxpayer(s) to submit the return, with any necessary payment, to the Internal Revenue Service and/or the appropriate State tax authority.

So why is the requirement to transmit the tax return electronically placed upon the professional tax preparer and not the individual taxpayer?

It is true that in most cases the tax preparer will use tax return software to complete the return, and included in the software is the ability to electronically transmit the return to the IRS and state agency. And in most cases the taxpayer(s) will request or permit the tax professional to do so.

The State of New Jersey (and, I believe, other states as well) wants all sales tax and state payroll tax returns submitted electronically, so it requires it to be so. A business can no longer submit a paper ST-50 (sales tax return) or a paper NJ-927 (payroll tax return). All sales and payroll tax returns must be submitted electronically.

New Jersey does not say that all accountants, bookkeepers or tax professionals are required to submit the sales and payroll tax returns of their business clients electronically. It says that all applicable taxpayers (in this case the taxpayer is a business) must do so.

I have no problem, upon their request, submitting the sales and payroll tax returns for my few remaining business clients, returns that I had previously done by hand, online – and do so gladly. This is because I can submit these returns free of charge very easily via the NJ Division of Taxation website. And so can the business owner himself/herself, or an officer or employee of the business.

New Jersey does not require the business, or I, to purchase an expensive, otherwise unnecessary, and flawed software package, with annual updates, in order to file the required forms electronically.

Because the State requires it to be done electronically the State provides a way to do so that is free and easy. And because of that there is compliance.

Now I suppose if a business owner’s legitimate religion forbid him/her from transmitting information electronically, or if he/she had a legitimate mental disability or infirmity that caused him/her to fear electronic transmittal, or if a business owner was very seriously afraid of or opposed to transmitting data electronically the State of NJ may, after carefully reviewing the specific facts and circumstances, permit a manual return to be filed – but I cannot say for sure.

Congress, and the IRS, wants all Americans to file federal income tax returns electronically. Yet it places the requirement upon the return preparer and not the taxpayer.

And, currently, while the IRS has experimented with limited-availability “free-file” scenarios, it first requires tax preparers to apply, and be accepted, as an “Electronic Return Originator” (ERO) and to purchase expensive and flawed tax preparation software in order to transmit 1040s (and 1040As) electronically.

If Congress, and the IRS, wants all federal individual income tax returns submitted electronically then why does it not require all taxpayers to so do, as New Jersey does with sales and payroll tax returns.

I do not believe that Congress can do that yet. There are still many individuals who have serious and legitimate concerns, justified by reality or not, about the security of electronically transmitted information of such a private and personal nature.

What Congress should do is to is strongly request that all Americans file their 1040s and 1040As electronically, and assure the public that doing so is perfectly safe and secure (or as safe and secure as humanly possible). Those who do not wish to do so must attach a signed statement to the manually submitted return.

And Congress must allow all taxpayers, and their tax professionals, to submit all 1040s and 1040As free of charge directly to the IRS, without need for a middle-man or 3rd-party contractor as is the case with the “free-file” program and without special software, via the IRS website.

The State of New Jersey does exactly that with its NJWebFile program (although NJWebFile is not available for all NJ-1040s due to system deficiencies). And NJ offers an additional incentive to use NJWebFile. Manually submitted returns cannot request direct deposit of any refunds – but one can do so if the return is filed using NJWebFile. Even when direct deposit is not requested taxpayers receive refund checks quicker if the return is submitted via NJWebFile.

Congress should follow NJ’s lead, for a change (not something that I would normally recommend), and provide electronic filers with some kind of incentive – not a punishment for filing manually but a premium for filing electronically. Perhaps a $25.00 ($50.00 married filing joint) tax credit.

Why does Congress place the requirement upon the tax preparer and not the taxpayer? Because it is easier to do so, and because they can. Neither are legitimate reasons!

I will only file federal income tax returns electronically if I can do so free, and fairly easy, via the IRS website.

So – what do you think?


Thursday, June 24, 2010


Here is the text of a letter I have sent to IRS Commissioner Douglas Shulman regarding the new requirement that all tax return preparers who prepare 10 or more returns must file 1040s electronically beginning with the 2010 returns filed in 2011 -

Dear Commissioner Shulman:

I can understand why the Internal Revenue Service wants all returns eventually submitted electronically, and why Congress chose to require all return preparers to do so beginning with 2010 returns filed in 2011.

Electronically submitted returns cut down substantially on IRS processing costs. There is no longer the need for a “middle-man” data entry clerk to enter information from paper returns into the IRS computer system.

Electronically submitted returns also reduce human error. Since the preparer of the return is basically entering the information directly into the IRS system one avoids the potential for errors made by the “middle-man” IRS data entry clerks.

I am not against electronically submitting income tax returns. I do so with many NJ state income tax returns via NJWebFile. I can go to a site within the NJ Division of Taxation portal and directly enter the information that normally would have been presented on the NJ-1040.

The problem with the NJWebFile system is that is has too many limitations and conditions. I cannot submit NJ-1040s that report income from self-employment, either from a federal Schedule C or a K-1. There are also limitations in the number of source information returns that can be entered. When using the NJWebFile system you do not merely enter NJ-1040 line totals, such as total wages or total interest or total dividends. You enter the information from each W-2 or 1099 separately.

In 39 tax seasons I have never used flawed tax preparation software to prepare federal or state individual income tax returns. I have no intention of starting now. I am not going to spend thousands of dollars each year, resulting in higher fees to my clients, on the initial purchase and annual update of tax preparation software.

It is my understanding that currently in order to submit federal income tax returns electronically one must use flawed tax preparation software and enroll as an Electronic Return Originator (ERO).

I will gladly comply with the Congressional mandate for electronic filing as long as I can do so at no additional cost to me, or my client, via the IRS website.

The IRS had made attempts at an online “free-file” program in the past, but its availability was extremely limited and it was done not directly by the IRS but via 3rd party contractors with conflicting profit motives.

I can understand the IRS requiring an enrollment and renewal fee for its new tax preparer registration regime. This is a minor amount that will be used to fund the program, which will provide benefits both to me as a tax preparer and the taxpaying public, as well as the Internal Revenue Service.

I do not see how Congress or the IRS can require me to spend thousands of dollars each year to purchase software to comply with this new requirement. And, if all tax return preparers are required to be registered, and all tax return preparers are required to submit returns electronically, there is no need for the additional step of becoming an Electronic Return Originator.

Will the Internal Revenue Service be providing tax preparers with a free method of submitting income tax returns online? Or will it force all preparers to choose to either purchase expensive, flawed software or request that their clients OPT OUT of electronic filing?

Thank you for your cooperation.

Sincerely yours, Robert D Flach

So what do you think?


Wednesday, June 23, 2010


I just couldn’t stay away – and I am sure you knew it. GDEs be damned!

* This week’s article at MAINSTREET.COM is “When Is Your Small Business Really A Hobby?” (by yours truly).

* Jim Wang talks about “6 Documents You Need But Hate Thinking About” at BARGAINEERING.

Trust me, if you have elderly parents you should make sure all of these things are in order while they are still “competent” – you do not want to wait until there is a “situation” before getting thinking about them.

* Kay Bell, the Yellow Rose of Taxes, has begun her series of Mid-Year Tax Moves with “Midyear Tax Tip #1: Welcome Summer with Energy-Related Tax Breaks”.

Kay asked me to submit a mid-year move, which I did. So be on the lookout for mine.

* I somehow overlooked Kay’s 3-D (or triple-D) post from last week “Deductions Demand Documentation”. One can never over-stress this truism.

Kay’s post discusses a Tax Court case involving charitable contributions. A few items of note from the post –

(1) “The Court noted that IRS findings in such cases ‘are presumed correct, and the taxpayer bears the burden of proving error in the Commissioner’s determinations’.

Further, said the Court, ‘Deductions are a matter of legislative grace, and the taxpayer bears the burden of proving he is entitled to the deductions claimed’.

Got that? When it comes to dealing with the IRS, you're presumed guilty. That is, the IRS' position is the one the courts will believe from the get go. It's up to you to convince the tax agency's examiner and/or auditor otherwise

(2) “Although the panhandlers might truly need the few bucks you dispense as you wait for the traffic light to turn green, they are not an official charitable group. That means your gift to them -- or any individual, such as the family down the street whose house burned down -- is not an IRS qualified tax deduction.”

(3) “And don't forget to get a proper receipt or have some sort of acceptable substantiation, such as a canceled check or credit card statement that shows all the tax-required details of the gift.”

* Speaking of mid-year tax moves, an INC.COM article by Issie Lapowsky tells us “How to Prepare for Next Tax Season Now”.

Bloggers love lists, and accountants love acronyms. This article brings us the acronym PLAN from Miami-based public accountant Adam Spiegel -

P = “prepare your records ahead of time.”
L = “list your issues and questions.”
A = “analyze your financial statements for accuracy."
N = “note the changes in laws during the year and discuss them with your tax advisor

* The TAX POLICY BLOG’s “Monday Map: Property Taxes on Housing by State” indicates that New Jersey is #2 on the list. Garden Staters pay, on average, 1.74% of the value of their homes in real estate taxes. I would have thought it would be the most expensive state – but it was beaten by Texas with 1.76%. CT is #8, but NY and CA are not even in the top 10.

No juvenile jokes about NJ and “#2”.

* Over at TAX GIRL Kelly Phillips Erb sets straight a taxpayer who is “leaving my full-time job 2 start grad school” and “Moving 300 miles” in “Ask the taxgirl: Moving Expenses

* Who said life, or taxes, is fair. Joe Kristan explains that “The Geithner Rule Only Applies to Geithner” over at the ROTH AND COMPANY TAX UPDATE BLOG.

The taxpayer had very similar circumstances to those of Treasury Secretary Geithner, who got a pass on his tax FU. However, this pass is only available to the politically connected. Joe quotes the Court as saying –

Regardless of the facts and circumstances relating to the case to which petitioner refers involving U.S. Secretary of the Treasury Timothy Geithner, petitioner is required to establish on the basis of the facts and circumstances that are established by the record in his own case that there was reasonable cause for, and that he acted in good faith with respect to, the underpayment for each of his taxable years 2005 and 2006 that is attributable to his failure to report self-employment tax.”

While I agree with the Court that the facts and circumstances of the specific case must determine the decision – it does not make the fact that Geithner got away with his tax faux pas any less wrong.

* Two items caught my attention from the ACCOUNTANTSWORLD.COM daily headline news e-letter:

(1) Despite controversial ads Yahoo Finance points out that “Pa. Collects $261 Million in Tax Amnesty Program”. And

(2) It also reports that “New Jersey Democrats Fail to Extend Millionaires Tax”. Whenever New Jersey Democrats fail it is good news. Unfortunately, any “millionaire tax” would not have applied to me.

* The CCH daily headline e-letter reports “Tax Bill in Limbo”. So the popular “extenders” are still currently unextended.

* Oops - they did it again! Another refundable credit - which means another open call for tax fraud. Bill Perez reports in "Adoption Credit Expanded for 2010" at WILLIAM'S TAX PLANNING BLOG that "The adoption credit is worth a maximum of $13,170 for 2010 and will be a refundable credit".

To quote the anti-war anthem of my youth - when will they ever learn? When will they ever learn?


Tuesday, June 22, 2010


This summer reruns first appeared on June 3, 2008 - rdf.
I came across an interesting Tax Court case in the June issue of NATP’s TAXPRO Monthly.

The case is David and Gail Vigil v. Commissioner (TC Summary Opinion 2008-6).

Vigil had deducted $3,463 for meals and entertainment, $12,347 for travel expenses, $7,862 for supplies, and $17,199 for car and truck expenses. In audit the IRS disallowed all of these deductions because Virgil failed to provide any substantiation.

You are allowed to deduct “all ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business” under Internal Revenue Code Section 162(a). However taxpayers are also required under IRC Section 274(d) to maintain and substantiate records for such deductions claimed.

In this situation Vigil claimed that he kept a record of the various locations where he conducted his business and also of the mileage driven. He used credit cards for business expenses and kept the receipts. However he gave the original receipts and documentation to his tax preparer, a CPA, but did not keep any copies. The CPA developed a drug problem and later died. The CPA’s wife, who took over the business, also developed a drug problem. Even with the help of the local sheriff Mr. Vigil was unable to get any of his documentation back from her.

In a situation where receipts and documentation are not available you can “estimate” deductible expenses if you can produce sufficient evidence and establish a rational basis on which the estimate can be made under the famous “Cohan Rule” (Cohan v. Commissioner, 50 TC 823, 827-828). In addition you can substantiate deductions through reconstruction of expenditures through other credible evidence if your records are lost or destroyed through circumstances beyond your control (Smith v. Commissioner, TC Memo 1998-33).

The Tax Court decided for the IRS because Virgil was not able to adequately reconstruct his records and he did not provide sufficient evidence for the court to estimate the amount of his expenses.

There are two morals to this story –

(1) Make sure you have receipts and documentation (i.e. a travel diary) for all business expenses.

(2) If you give original receipts to your tax professional make sure you get them all back with the completed return. You may want to make copies just in case before handing the receipts over to your preparer.

A possible third moral – beware if your tax preparer has traces of a white powder around his nose!

Whatever you do also never give or send original receipts or documents to the IRS. Give the IRS, or state tax auditor, photocopies of your receipts and documentation - always keep the originals for yourself in a safe and secure place. You can show the IRS or state auditor originals, but do not let him/her keep them.

As an aside, in this case Virgil deducted both actual auto expenses and the standard mileage allowance. You can’t do both – it is one or the other. And there are special rules as to which you can deduct.


Monday, June 21, 2010


While I am working away on the GD extensions - here is the first in a series of summer reruns, originally published July 11, 2007 - rdf.
The Form K-1 for a limited partnership investment is the scourge of the tax preparer!

Over the years I have had many clients who, in addition to shares of stock or mutual funds, also owned “units” of a limited partnership venture. If you own stock or mutual funds you report on your Form 1040 any dividends received. While investors in a limited partnership may receive distributions similar to dividends, they do not report what they have received from the partnership but instead their “distributive share” of the entity’s individual sources of income, losses, deductions and credits. A limited partner receives a Form K-1 to report his/her distributive share of the income, losses, deductions and credits.

The first problem with K-1s from the point of view of a tax preparer is that they always arrive late. Unlike other tax information reporting forms, like 1099s and 1098s which are required to be sent to taxpayers by January 31st, investors do not receive their Form K-1s until the middle or end of March. Some do not come until April. The due date of the federal partnership tax return, Form 1065, is generally the same as the due date for the Form 1040. Because I do not want to work on 1040s in “installments” I cannot begin the tax return of a client with limited partnership investments until late in the season, when I am usually already backed up.

The second problem is that because limited partnerships invest in real estate, oil and gas, timber, commodities and futures, and the like they often generate unique deductions and credits that must be reported on any number of obscure supplemental tax forms and schedules. Each form and schedule takes time to complete. In most cases it seems to me that I am spending an hour or more to complete all the required supplemental forms and schedules to provide the client with a minimum effective tax savings. It costs more to prepare the multitude of forms and schedules than any ultimate tax benefits provided!

The third is that because of the nature of limited partnership investments you cannot simply take the individual items of income, deduction and credit reported on the many lines of the Form K-1 and directly transfer them to the 1040 as is – not that that is a simple process. Limited partnerships fall under the rules of a “passive investment” and as a result are limited in the amount of losses, deductions or credits that can be claimed.

An investor in a limited partnership is a “limited” partner. A “general partner” manages the business and is personally liable for the debts of the partnership. A “limited partner” is liable only to the extent of his/her dollar investment in the partnership. If a person invests $1,000.00 as a limited partner the most he can lose is the $1,000.00. The deduction of losses from a limited partnership is first limited to the investor’s “at risk” basis. Generally a limited partner with an investment of $1,000.00 can only deduct up to $1,000.00 in losses from the entity.

Limited partnership losses are also subject to the passive loss limitation rules. As a general rule passive losses are only deductible to the extent of passive income. In the acronyms of the tax world, a PAL (passive activity loss) needs a PIG (passive income generator). Losses that cannot be deducted on the current year Form 1040 are “suspended” until the investment is disposed of (you sell your units or the partnership terminates) or passive income is generated. And who do you think is going to be the one to keep track of all these suspended losses – certainly not the client!

Generally losses from one limited partnership can be deducted against income from another limited partnership. However, there is a special type of limited partnership called a Publicly Traded Partnership (PTP). You can offset losses from a PTP only against income or gain from the same PTP. You cannot apply losses from a PTP against excess gain from another limited partnership. Income and losses from a PTP are not reported on Form 8582 (Passive Activity Loss Limitations). Any net income from current year activity less prior year unallowed losses is reported as “nonpassive income” directly on Schedule E. So PTPs require even more detailed recordkeeping.

Why do individuals invest in limited partnerships? I doubt any of my clients that have owned a limited partnership investment over the years actually called up his/her broker and said, “I want to buy some units of XYZ Timber LP.” Individuals invest in limited partnerships because their brokers tell them to!

While I cannot say this with certainty, it is my belief that brokers receive a higher commission from selling limited partnership units than from selling traditional shares of stock. Similar to the fact that a broker will receive a higher commission from selling an annuity. In many cases the brokerage house will “encourage” their brokers to push a certain limited partnership in which the house has some kind of vested interest. I remember years ago when almost all my clients with accounts at Shearson (a name that has disappeared due to multiple subsequent mergers) owned a Balcor limited partnership.

As I do not own any limited partnership units myself (the only time I was tempted was when I received an offering from Broadway produced Alexander Cohen to invest in a Peter Cooke and Dudley Moore review back in the 1970s – instead I invested in my own local production of Stephen Sondheim’s COMPANY which did not show a profit, unlike the Cooke and Moore show) and I do not follow the market, I cannot say whether a limited partnership investment has the potential to return a greater profit than a stock or bond investment. I do know that several limited partnerships offer the pas through to investors of specialized tax credits – although often these credits must eventually be “recaptured”, which causes more tax preparation nightmares.

As a point of information - for a great while the IRS was not able to properly match K-1 information to 1040s, as it has been able to do with 1099 information returns for just about all of my years in “the business”. However that appears to no longer be true. Already this year I have seen IRS notices regarding income from 2006 K-1s not reported on the corresponding Form 1040.

I would certainly welcome hearing from brokers on the merits of investing in a limited partnership, and would also be interested in knowing if brokers do indeed receive a greater commission or incentive to sell such investments (you can make your comments anonymously). I want to know if the necessary additional tax preparation fees charged to clients for all the extra work and agita that comes with limited partnership Form K-1s is worth it. I also welcome comments from taxpayers who have invested in a limited partnership and from fellow tax preparers.


I have been using every excuse possible to avoid working on the GD extensions that I can complete – but it must stop! I want to have nothing but “red files” by July 1st.

So I must devote the next two weeks to pretty much nothing but GDEs (and one final corporate income tax return with a fast-approaching deadline) – except for taking Wednesdays off (hey – all work and no play . . .).

Unless there is important breaking news I expect I not to be writing any new posts – including the bi-weekly BUZZ – until the GDEs are done. Instead I will publish a series of "summer re-runs".


Saturday, June 19, 2010


Sorry to be late in getting today’s BUZZ up. My internet connection went down on Thursday. I was finally able to trace the problem to a faulty connection that involved my Vonage phone box. I switched wires this morning and was able to get online, although my phone is still out (no loss). I may have missed some good items – but will include any I come across in next Wednesday’s edition.

* Nothing from me at MAINSTREET.COM this week, but you might enjoy an article there that discusses an online tool to “Calculate The Cost of Your Child”.

The article tells us that “a study by the U.S. Department of Agriculture estimated that it costs $222,360 to raise a child”!

It costs a lot less to raise a cat – and raising a cat generates much less agita than raising a child.

* The Tax Foundation’s TAX POLICY BLOG reports on some interesting statistics from a Joint Committee on Taxation report in “Millions Pay No Income or Payroll Taxes Thanks to Refundable Credits”. The highlights below are mine -

In a May 28, 2010 letter to Representative Dave Camp and Senator Kent Conrad, JCT reports that between 2000 and 2006 the number of returns with refundable credits in excess of the employee's share of payroll taxes increased from 11.8 million to 16.1 million. In 2009 and 2010, those figures jumped to 23 million because of such things as the making work pay credit and the lowering of the income threshold for determining the refundable portion of the child credit to $3,000.

JCT projects that the number of returns with refundable credits exceeding the employee's share of payroll taxes will hover between 14 million and 15 million for the next ten years

* The WPIX morning news show led me to SEE THROUGH NY – “A Window on Your Money”.

This site gives “New Yorkers a clearer view of how their state and local tax dollars are spent. This site is sponsored by the Empire Center for New York State Policy, part of the non-partisan and non-profit Manhattan Institute for Policy Research.” The information comes from official government sources.

You can look up the salary paid to any employee in any state or local position in New York, as well as other expenditures and a special category called “Legislative Pork Barrel Member Items".

If you want to know why your property taxes as a NYS resident are so high look up the salary of your local Superintendent of Schools. The news item on WPIX showed two examples where a local Superintendent of Schools was earning more than $400,000 in salary!

I wish there were a similar site for the State of New Jersey.

* PORTFOLIO.COM tells us in “The Few, the Proud, the Tax-Free” that “The House has voted to eliminate capital gains taxes on investments in small businesses through the end of next year.”

The tax break, part of The Small Business Jobs Tax Relief Act of 2010 (H.R. 5486), only applies to investments in C corporations acquired after August 10, 1993 by a taxpayer other than a corporation, at its original issue, for money, for property other than stock, or as compensation for services other than underwriting. The stock must be held for at least 5 years. Both before and immediately after the issue date, a qualified small business corporation's aggregate gross assets cannot exceed $50 million. The maximum gain eligible for exclusion in any one year is $10 million less any gains excluded in previous years, and is further limited to a gain that is not more than 10 times the adjusted basis of the stock. Other restrictions apply.

* The extenders bill still has not passed the Senate. Kay Bell keeps us up to date on the latest “story arc” of AS THE CONGRESS TURNS in “Tax Extenders Senate Saga Continues” and “Today's Episode of Tax Extenders Folly” at DON’T MESS WITH TAXES.

* Bruce, the MISSOURI TAX GUY, comments on the new registration, testing and continuing education requirements for tax preparers in “Get This Fixed. . .”.

Now maybe I am getting this all wrong but when we say, 'all return preparers' let’s mean all of us. CPA’s, Lawyers, EA’s and the soon to be “enrolled” and registered preparers. That would be all.”

Right on, my brother!

* Kelly Phillips Erb wonders “Do Celebs Influence Tax Policy?” at WALLETPOP. The item references the idiot known as Snookie from the steaming pile of excrement titled THE JERSEY SHORE.

I have the greatest respect for the intelligence, wit and ability of women, especially my fellow tax-bloggers of the opposite sex. You won’t catch me telling a blonde joke. However, sad as it is to say, Snookie, those allegedly “real” housewives, and any of the other females (they are too immature to be called women, and no one would ever mistake them for ladies) that populate the reality tv shows of MTV, VH1, E! and just about every other network are truly only good for one thing. And I would have to be very, very drunk to even think about it. I certainly hope nobody listens to, let alone gives any thought or weight to, the blabberings of these cafones on any topic.


Thursday, June 17, 2010


I believe there is nothing wrong or unethical with a tax preparer telling a client that becoming an S-corporation will reduce one’s chance of an audit.

Saying to a client, “A business organized as a sub-chapter S corporation is less likely to be audited than one organized as a regular C corporation or a sole proprietorship” is apparently merely making a statement of fact, the proof of which is readily available to the public in published IRS statistics.

I do, however, believe that tax decisions should be made based on tax law and not on potential audit risk, that organizing one’s small business as a sub-chapter S corporation is not the best option in many if not most cases, and that advising a client to organize one’s business as a sub-chapter S corporation for no other reason than to avoid an audit is terrible tax advice.

If a tax preparer is going to tell a client that a sub-S corporation has less of a chance of being audited he/she also has the obligation to tell the client that becoming a sub-S corporation, or a regular C corporation, involves substantially much more paperwork, filing requirements, expense and agita then becoming an LLC taxed as the default entity, and can have the potential for substantial additional tax at termination or, in the case of a sub-S, reclassification to a C corporation.

A good tax professional will review all the entity options available to the client, and apply the pros and cons of each option to the specific business operation and tax situation of the client. While audit potential may be a consideration in the overall decision, it is an extremely minor one.

I have always said that “an IRS audit is not something that should be avoided at all costs. Tax returns should be prepared, and decisions about choosing a business entity should be made, in such a manner as to generate the absolute least amount of federal, state and local taxes (income and payroll) within the parameters of federal and state laws. If you will pay less tax (income and payroll), fees and other costs by filing a Schedule C you should do so, honestly and ethically, and not worry about being audited. If your return is prepared correctly, and you document all items of income and deduction properly upfront, then an audit is nothing more than an inconvenience.”

I have also said -

I believe it is bad advice to tell ALL taxpayers who have a Schedule C business to incorporate. There is no tax advice that applies to all businesses in all situations (except don’t cheat). The decision to incorporate a business requires careful review of all the specific facts and circumstances of the individual situation. And taxes are not the only consideration.”


Wednesday, June 16, 2010


Sorry I haven’t posted this week – but I am working away on the GD extensions. Unless there is breaking news I probably won’t post again until Saturday’s BUZZ edition.
* Thanks to Joe of CAFETAX for including my post on “How I Got My Clients” in his BUZZ-like “Extender Update & The Around the Web”.

* While I was relaxing in Beach Haven MAINSTREET.COM published my article “Tax Tip: Deduct Your Pet”.

* Professor Mary O'Keeffe provides a great example of why the Registration and Licensure of all tax preparers is a good thing, and why tax preparers should be forbidden from offering Refund Anticipation Loans, in her post “Daddy's Money Pawn Shop Is a ‘Full-Service’ Operation--They'll Do Your Taxes Too at BED BUFFALOES IN YOUR TAX CODE.

According to the source material for the post “Daddy” “typically takes him less than 30 minutes” to prepare each tax return. Need I say more?

* TAX GIRL Kelly Phillips Erb, writing at WALLETPOP, suggests “5 Things You Can Do Now to Get Ready for Huge Tax Hikes in 2011”.

“Thing” #2 concerns converting from a traditional IRA to a ROTH in 2010 –

Taxpayers can opt to pay federal income tax associated with the conversion over two years, but that might not be the best idea if rates are going up. Paying up in 2010 likely means a lower tax rate. And if rates continue to go up, you can breathe a sigh of relief, since future distributions from a Roth IRA will be paid out income tax free.”

I have decided not to do what she suggests in her last “thing”.

* The last person I would listen to on anything – period - let along the subject of taxes is Snookie, the self-absorbed brain dead idiot who appears on THE JERSEY SHORE, a program that is an insult to the State of NJ (I do believe the arsehole is not even from NJ).

Kay Bell tells us that politics, and taxes, does indeed make strange bedfellows in “Snooki, McCain and IRS Talk Tanning Tax” at DON’T MESS WITH TAXES.

The next thing you know similarly self-absorbed Kate will be speaking out on the Child Care Credit. Whoever is providing child care to the “eight” has got to be better at parenting than their mother!

* Kay also tells us that the check will not be in the mail in her post “Direct Deposit to Replace U.S. Checks”.

If you have a bank account, the your federal benefits such as Social Security, unemployment insurance, veterans benefits and railroad retirement will go there.

If you don't have an account at a financial institution, Uncle Sam will issue your benefits via plastic using the the Treasury Department's Direct Express Debit MasterCard program

When will this begin? “The new electronic payment rule will, for the most part, take effect in March 2011”.

Kay says this new rule will not initially apply to federal income tax refunds – although we expect it will be eventually.

* A tweet led me indirectly to “Choices For Your 401(k) When You Leave Your Job” at FREE FROM BROKE (“A Personal Finance Blog for Regular Folks”). It lists the pros and cons of the various options available in such a situation.

Whatever you do you should not “cash out”.

* Daniel Stoica has been running a series of informative posts on the taxation of “aliens” and foreigners in his unnamed blog, beginning with “Classification of Taxpayers for U.S. Tax Purposes”.

* Russ Fox wonders how the new electronic filing requirement for tax preparers, which begins with the filing of 2010 returns in 2011 (I thought I had heard from NATP that this was being pushed ahead one year?), will affect my practice in his post “Mandatory IRS eFiling Is Coming” at TAXABLE TALK.

What’s unknown today is what impact this will have on older tax professionals. Most of the member of OCEA use software–even those preparing just a few returns a year–but there are a few individuals who don’t. Like Robert Flach they’ve never used software and see no reason to start today. I doubt the IRS is going to make a free e-file system available, so this could cause some preparers to either retire or drastically change their methodology.”

Thanks for your concern, Russ. I do not intend to retire or to drastically change my methodology. I also have no intention of spending one penny on flawed tax preparation software. If, as you suggest, the IRS will not make a free e-file system, similar to NJWebFile, available, I will just request all my clients to sign an OPT-OUT form.

If the OPT-OUT form requires a reason I will have them simply state – “The IRS does not provide a free way for my tax preparer to directly submit returns online at its website. I do not want to increase my preparer’s expenses, and ultimately my fee, by forcing him to purchase flawed tax preparation software.”

* MISSOURI TAX GUY Bruce also touches on this topic in “Electronic Filing Mandate”.

It is good to have Bruce back among the blogging.

* DOWN THE SHORE WITH JEN’s Jen Miller “turned me on to” a new website that proclaims Jersey Doesn’t Stink.

New Jersey’s politics, greedy politicians, high taxes, and obstacles for small business really do stink. And it goes without saying that excrement like THE JERSEY SHORE and JERSEYLICOUS truly stink. But the State itself does not – and has much to offer (if you can afford to stay here).

* Professor Jim Maule continues to fight the good fight with his post “Tax Credits on Parade” at MAULED AGAIN.

The Professor also speaks for me when he says -

One of my objections to the use of credits is the fact that almost all of them have nothing to do with revenue and much to do with shifting to the IRS programs that should be, but for some reason are not, administered by other federal agencies. Another objection is the creation of more opportunities for mischief. As I noted in Congress and Tax Audits: Criticizing Others for Its Own Mess, ‘Each time the geniuses in the Congress adds another credit or deduction to appease some special interest group or to reward some constituency, it adds another opportunity for tax cheats, con artists, and tax shelter designers, who are not the intended beneficiaries of this legislative largess, to siphon tax revenue from the system’.”


Sunday, June 13, 2010


I am back from a blessedly “totally 1040 free” but all too brief visit to Beach Haven on Long Beach Island. As usual the visit was scheduled around a musical at the Surflight Theatre (producing shows on LBI since 1949) – this time Rodgers and Hart’s ON YOUR TOES.

I once again stayed at the Coral Seas Oceanfront Motel. However I goofed in my timing – had I booked a week earlier, as I apparently did last year, I would have saved $30 (plus tax) per night for Friday and Saturday (June 11th is the date the rates begin to rise for the “season”. Plus I would have been able to secure a room with an ocean-facing terrace. When I stayed here in June of 2009 the motel was almost empty. This year it was “chock-a-block” – such that almost all parking spots were taken on Friday and Saturday. I will know better when I plan next year’s travel schedule.

The town itself was also much more populated than last year. Although on the plus side this year I was able to find an open ice cream store for an afternoon treat.

Not having a terrace I alternated my mystery reading between the bench on the walkway leading to the beach at the end of Coral Street, which this year provided me with an actual ocean view, and a gazebo overlooking the Bay next to the Municipal Boat Ramp, located behind the Schooners Wharf and Bay Village shopping malls. The weather was perfect – not too hot with lots of cool ocean and bay breezes.

I tried two new dining venues this year – Howard’s Restaurant for dinner (recommended, I think, by a client) and the popular Chicken or the Egg, or the “Chegg”, for breakfast. Great crab cakes and baked potato at Howard’s and an excellent breakfast combo at the Chegg. I returned to the Engleside Inn for my before-theatre dinner.

I knew of ON YOUR TOES (not to be confused with Cole Porter’s SILK STOCKINGS, also dealing with the Russian ballet, which is a musical version of NINOTCKA) but had never seen it. Lots of great dancing, combining tap and ballet, each Act ending with a mini-ballet (the 2nd Act ballet was “Slaughter on Tenth Ave”). But the score was not especially memorable, the only resulting standard being “There’s A Small Hotel”.

The Surflight Theatre did its usual great job. And my seat was again excellent – third row center. It was the end of the run (the last performance was Saturday evening) and there were a lot of empty seats.

This year I drove the entire 18-mile length of the island – from Beach Haven to Barnegat Light.

While I am sorry to be back in Jersey City I cannot put off the GD extensions any more – and must devote the rest of the month to getting them done and in the mail.

I will be returning to Beach Haven at the end of September for the Surflight Theatre’s production of THE MELODY LINGERS ON: THE SONGS OF IRVING BERLIN.


Friday, June 11, 2010


While Congress is known for being lazy, it cannot accomplish a simple task simply.

Congress wants to extend a laundry list of expiring tax breaks that it believes are appropriate for another year, rather then making them permanent and not having to waste time each and every year extending them. This in itself is stupid – but if that is what they want so be it.

However, Congress cannot just sit down and write a bill that extends these tax breaks for another year. They have to sneak in tons of pork, either to “buy” the votes of certain members or to pay back special interests for campaign contributions and various other “gifts”. And add additional items of legislation that may not be as popular as extending the tax breaks so as to secure their enactment. And then they have to include poorly thought out income generators to pay for the pork and less popular provisions.

While we are talking about the extenders bill let’s take a look at the popular 1040 items and see if they are really worth extending -

(1) The option to deduct state and local sales tax instead of state and local income tax.

I do not understand why it must be either or – if state and local taxes are deductible (including personal property and real estate) then all state and local taxes should be deductible.

That said, this option does provide an added tax benefit for those in states with no state income tax, as well as for many retired individuals who pay no state income tax because of their status.

(2) The “above-the-line” adjustment to income for qualified tuition and fees.

BO’s new American Opportunity Credit pretty much makes all other tax benefits for the cost of a bachelor’s degree obsolete. However it does not apply to graduate school expenses. This above-the-line deduction provides some tax benefit for graduate students.

If the Tax Code must be used to subsidize higher education (and I do not believe it should – the subsidies should be provided, but done in a more appropriate way) then this deduction should be continued.

(3) The ability to make a tax-free transfer of up to $100,000 directly from an IRA to a qualified charity.

I like this greatly underused tax benefit and support its continuance. Perhaps I should “tout” it more in a future TWTP post.

• The “above the line” adjustment to income for educator expenses.

This deduction for a minor portion of a specific profession’s employee business expenses makes no sense. Besides, it comes down to nothing more than simply handing, on average, $63.00 to K-12 teachers. Big deal!

While teachers do make an important contribution to society, why are they any more deserving of this small hand-out than police officers, firefighters, nurses, or members of any other similar public service profession?

If nothing else this is a testimony to the political power of the state teachers’ unions (like NJEA). Unfortunately these unions use their power mostly for selfish purposes and not to improve the actual education of America’s students.

• The additional $500 or $1,000 standard deduction for real estate taxes paid-.

This also makes absolutely no sense. Basically what it does is to provide an additional tax benefit to senior taxpayers, who have paid off their mortgage and do not have enough other deductions to itemize. Off hand I can only think of one client not age 65 or older that benefited from this on the 2009 return.

And why are real estate taxes more worthy of this treatment than charitable contributions or medical expenses?

FYI - I am currently relaxing in Beach Haven on LBI. There will be no BUZZ edition tomorrow (Saturday).

Thursday, June 10, 2010


Howard Gleckman believes that the mortgage interest deduction “is not a very efficient way to encourage home ownership. Most benefits go to high-income households that would probably buy a house with or without the deduction. Since non-itemizers get no benefit from the deduction, it is not surprising that most of the subsidy goes to upper-bracket taxpayers.” His post goes on to look at the alternatives to the current itemized deduction.

While I would support doing away with the “home equity” portion of the mortgage interest deduction, I am totally against repealing the deduction for acquisition debt.

The Internal Revenue Code taxes us based on income measured in pure dollars. However it is a fact that the “value” of one’s level of income differs based on one’s geographical location. A family living in the northeast (New York, certainly New Jersey, Connecticut) that has an income of $150,000 may be just getting by, while a similar family that resides elsewhere lives like royalty on $150,000. Many components of the Tax Code are indexed for inflation, but nothing is indexed for geography. To be honest I have no idea how one would even begin to index for geography.

It costs an awful lot to live in, for example, New York, certainly New Jersey, and Connecticut. State and local income, property and sales taxes are the highest in the country. The cost of real estate is also excessively high. As a result one must earn a lot more money to be able to live in these states – and salaries are arbitrarily increased to reflect the increased cost of living. Yet $150,000 in income is taxed by the federal government at the same rate in New York City as it is in Hope, Arkansas.

Because taxes and the cost of a home, and therefore also the amount of “acquisition debt” mortgage interest paid on a residence, are higher in the Northeast, the deduction for these items helps to somewhat geographically “equalize” the tax burden. Because one is taxed on net income after deductions, the larger deductions for taxes and mortgage interest causes those in higher cost-of-living areas to pay less income tax on the same gross income.

If the mortgage interest deduction is limited to acquisition indebtedness then more needs to be written in the legislation than just doing away with the deduction for interest for home-secured borrowing that is not used to buy, build or substantially improve a personal residence. Just doing away with the deduction would put an even greater recordkeeping burden on the taxpayer, and ultimately the tax preparer.

The legislation must create special new rules for banks and mortgage companies for issuing home-secured loans.

A “mortgage” loan would only be permitted for “acquisition debt”. Interest on a “mortgage” would be fully deductible, up to the current acquisition debt limitations. “Home equity debt” would have to be a totally separate loan, and interest on this type of loan would not be deductible. A Form 1098 would only be issued for interest paid on a “mortgage” loan, and the bank or mortgage company would be required to report only interest paid on up to $1 Million of principal.

One would not be able to refinance a home-secured loan to include both types of debt in one loan. Therefore a homeowner could not refinance a “mortgage” to get additional money in hand unless he/she could prove to the lender that the money is used to “substantially improve” the secured residence. One would have to refinance the “mortgage” for the exact same principal, adding perhaps related closing costs, and take out a separate “home equity” loan to get any money in hand.

By instituting these requirements a taxpayer, or his/her preparer, could then truly just take the amount of interest reported on the Form 1098 and transfer it to Schedule A.
So what do you think?


Wednesday, June 9, 2010


I thought I had come up with the perfect description of the misnamed genre known as “reality tv”.

In this recent BUZZ comment I apply the description as a kind of reverse synonym –

Any firm that GUARANTEES to resolve your tax debt for pennies on the dollar is full of reality tv.”

Alan Sepinwall has come up with the #2 (no pun intended) description – “Disgusting Freaks on Parade” – in his announcement of the premiere of a new VH-1 arse-dropping titled YOU’RE CUT OFF. The titled refers to what is done to a source of income, and not what most of us would love to have done to the males who populate reality tv shows.

The new show is another “parade” of self-absorbed brain-dead idiots showing off how badly they can behave.

There is no doubt that the world would be a better place if the fathers of those who appear on these displays of “disgusting freaks on parade” had done what the Vietnam War protesters of my teen years wished Nixon’s father had done.


Another short BUZZ.
* Now here, from Kay Bell at DON’T MESS WITH TAXES, is a tax deduction that I have never seen anyone claim in 39 tax seasons – “Tax Deduction for Paying Down U.S. Debt”.

* And, speaking of the Yellow Rose of Taxes, don’t forget to check out Kay’s “Tax Carnival 71: Celebrating June 2010”. I am in this one!

Two entries caught my attention -

“In Defense of the IRS” from THE SUN’S FINANCIAL DIARY gives a personal example of how the IRS will actually notify you if you made a mistake on your 1040 and they owe you money (instead of the other way around). Of course the NJ Division of Taxation would never do this - they just keep your money and hope you don’t discover the error.

And then there is “Beware of the Refund Anticipation Loan” from THE DIGERATI LIFE. This is always good advice – and bears repeating. The Silicon Valley Blogger tells us that with a RAL “Taxpayers end up losing a big chunk of their money just to get cash a week or two faster than they would with direct deposit.”
You will have to go to Kay's Carnival in order to link to these two items.
* Actually Kay herself follows up the Carnival with a good post on the evils of Refund Anticipation Loans titled "Refund Loans and the Once-a-Year 'Rich'".
Kay tells us that, "RALs are just one way that millions of dollars are being made off of the working poor".
I have been saying for quite some time now that tax preparers should be prohibited from offering RALs.
* Professor Nellen highlights some recent items that deal with Congress hiding program expenditures in the Tax Code in “Increasing Attention on Tax Expenditures (and Interesting, but Good, Irony in HR 4213)” at 21st CENTURY TAXATION.

In discussing one item the Professor correctly points out that “direct government spending which we can see as line items in some government agency's annual budget and spending hidden in the tax system (via tax deductions, credits and exemptions) achieve the same purpose. However, the tax expenditures are hidden. They do not get annual review and can easily grow and do grow.”

* The “great” State of New Jersey usually tops the lists of the highest taxes – property, income, sales, etc - in the country. However, as pointed out in the TAX POLICY BLOG’s “Monday Map: State Gasoline Tax Rates”, New Jersey almost has the lowest gas tax in the country – 14.5 cents per gallon. Only Wyoming at 14 cents and Alaska at 8 cents have a lower gas tax.

However, it is not enough to keep me from my eventual move to Pennsylvania.

FYI, California is the most expensive state at $46.6 cents per gallon, and New York is #2 at 44.6 cents.

* Bill Perez reminds us that “Next Estimated Tax Payments Due June 15th” at WILLIAM’S TAX PLANNING BLOG.

FYI – I will be relaxing in LBI for the next several days. There will be no BUZZ entry this coming Saturday.


Tuesday, June 8, 2010


There has been a lot written lately about whether or not to do away with the deduction on Schedule A for home mortgage interest.

Howard Gleckman posed the question “Should We Dump the Home Mortgage Interest Deduction?” at TAXVOX, the blog of the Tax Policy Center.

Kay Bell added her two cents to Howard’s commentary in “Is It Time to Kill the Mortgage Interest tax Deduction” at DON'T MESS WITH TAXES.

A recent tweet led me to the article “Mortgage Deduction: America's Costliest Tax Break” By Jeanne Sahadi at from April.

The CNNMoney article tells us that – “Between 2009 and 2013, the government will lose out on nearly $600 billion because of it, according to the Joint Committee on Taxation”.

{As an aside – the article also tells us that during the same period the Earned Income Credit will cost $261 Billion. Assuming that estimates are correct and at least 30% of all EIC claims are bogus that means $78 Billion tax dollars down the drain!}

Howard begins his post by asking the question “Do we want to use the tax code to subsidize home ownership?” Apparently Congress does – as they recently gave away up to $8000 of taxpayer money to just about anyone that purchased a personal residence.

First let us look at the current deduction for home mortgage interest -

The home mortgage interest deduction is not as simple as one would think. You cannot simply just add up the amounts on 1098s issued by mortgage holders and enter that number on Schedule A – although that is exactly what is done most of the time.

The deduction of interest on borrowing that is secured by a residence is limited based on type of debt – acquisition debt or home equity debt. And for purposes of calculating the dreaded Alternative Minimum Tax (AMT) home equity debt is not deductible.

Acquisition debt is debt acquired after October 13, 1987 to buy, build, or substantially improve your main residence or a qualified second home. A “substantial improvement” is one that adds value to the home, prolongs the home’s useful life, or adapts the home to new uses. The amount of interest that you can deduct on acquisition debt is limited to $1 Million ($500,000 if Married Filing Separately) of principal. Qualified acquisition debt also cannot exceed the cost of the home plus the cost of any “substantial” improvements.

Home equity debt – debt secured by a principal residence or second home that is not used to buy, build, or substantially improve the property. There is no restriction or limitation on what the money can be used for. You can use it to buy a car, pay down credit cards, or take a trip to Europe. The amount of interest that you can deduct on home equity debt is limited to $100,000 ($50,000 if married filing separately) of principal.

If you have combined mortgage debt of $850,000. and $600.000 is acquisition debt and $250,000 home equity debt, you can only deduct interest on $700,000 (assuming we are not talking about a separate return). If $800,000 is acquisition debt and $50,000 home equity borrowings, all of the interest is fully deductible. In either case only interest on $600,000 can be used in calculating the dreaded AMT.

It is possible to deduct some of the excess interest as investment interest if you can show that the money from the borrowing was used for qualified investment purposes.

FYI, when I first started to prepare taxes professionally all interest was fully deductible on Schedule A – auto loan interest, credit card interest, pension loan interest, personal loan interest, student loan interest, etc – regardless of one’s level of income and regardless of the amount of debt. Reagan phased out the deduction for “personal” interest in the Tax Reform Act of 1986 and created the new rules for deducting interest on “acquisition” and “home equity” debt.

In the years leading up to the recent financial FU, as the market value of one’s home increased unrealistically, and banks and mortgage companies were giving away money like crazy, homeowners would constantly refinance their mortgage and use the money, perhaps initially to make home improvements, but eventually to pay down credit cards, buy cars, pay for college, and so on. Often, unfortunately, once a credit card was paid down it was “charged up” again – resulting in additional refinancing to once again pay it down. It got so that the combined mortgage principal was as much as 2 or more times the original purchase price of the residence!

To be perfectly honest, in the 25 some years since the rules for deducting interest were revised I do not know of a single homeowner who voluntarily keeps contemporaneous documentation of the use of moneys received from multiple mortgage refinancing and home equity borrowings. I dare you to show me a taxpayer, other than one who still maintains his/her initial purchase mortgage, who can tell you to the dollar exactly how much of his total mortgage principal is acquisition debt and how much is home equity debt. If any of this is being done it is being done by we tax professionals after the fact and made up for the most part using best guess estimates.

There is obviously much abuse of the mortgage interest deduction as it is currently described in the Tax Code.

To be continued . . .